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Editor: John Mortimer

Monday, 6 March 2017

PSA-GM: The final solution?

It is quite clear that executives of General Motors Europe and PSA Group have been working behind the
scenes for quite some time in secret to cobble together a deal to off-load
General Motors’ Europe (GME) vehicle-making operations.

Even then, it does seem strange that the
announcement of PSA Group’s acquisition comes just hours before the opening of
the Geneva Motor Show, as if perhaps in some way it was deliberately
stage-managed to achieve maximum exposure and effect

Of course, PSA Group will want to be seen as
trying to create a ‘good image’ in the UK, which might give a clue to various
remarks being made about wanting to ‘make the two plants in the UK (Luton - making Vivaro vans - and
Elllesmere Port - making Astra passenger cars) profitable’. The clear inference being that if this is not
done then they will be closed. Failure cannot be tolerated.

However, it has to be remembered that PSA
Group does not have a good record when it comes to operating in the UK. It
closed its plant in Ryton, Warwickshire in 2007 with the loss of some 2,000
jobs. So workers at both Ellesmere Port and Luton will be bearing this in mind
as their respective plants move to profitability.

Two years later, in 2009, but in mainland Europe, Carl-Peter Forster, GME's then chief executive, supported a deal to sell Opel/Vauxhall to the Canadian parts maker Magna International. He was replaced by UK's Nick Reilly who repoprtedly turned round GME's operations. When Reilly retired in 2012 his place was taken by Karl-Frederick Stracke.

But more recently than, in May 2012, GME
executives had their own problems as they unfurled restructuring plans in a bid
to return the operation to profit. At that time, GME executives had to placate
German workers in Opel’s mother plant in Russelsheim.

Even then GME was in the midst of making
intricate and politically sensitive decisions on future production allocation
to its plants, including vehicles made in conjunction with PSA Group. No doubt
these included plans for small vans.

So even at that point, GME executives must
have been mulling the ‘final solution’ – dump the European vehicle plants on
PSA and run away from Europe. In 2011 GME made a loss of US$747 million.

Cross-company review of performance

At the time – May 2012 – Karl-Frederick Stracke
said: “it is in no way a pure cost-cutting exercise, rather it will be a
comprehensive strategy under which we will quickly return to profitability. By
2016 we will clearly improve our margins, market share and revenues.”

Well, here we are in the first flush of 2017
and nothing has changed. Stracke’s forecast of profits has come to nought. So
the only solution was – the ‘final solution’.

Either Stracke did not know what he was
talking about, or the plans the GME executive cobbled together were completely
off register in being able to deliver the returns needed. The ‘plan’ clearly
was not a sensible plan – one that could deliver the results required.

It cannot be argued the European market is
dead. BMW, Daimler and Volkswagen (which launched its Arteon (below) at Geneva and despite its fraudulent diesel emissions
episode) can make vehicle-building a profitable activity. And PSA Group
likewise, even though owned 14 per cent by the French government, has been able
to turn round its business.

Of course, in one sense the writing has been
on the wall ever since GM unloaded its Millbrook Proving Group in the UK. This
was, in effect, the beginning of the end as work was centralised in its Technical
Centre in Germany which will become part of te National Sales Company. quite what its long-term future will be remains to be seen but insiders are expecting no immediate changes - and changes will be long-term.

GME was founded on 4 April 1986. It has lasted
just 31 years. It this period it has developed operations in Germany, Spain, the UK, Sweden,
Hungary, Poland, Belgium and Russia and in 2009 employed 54,500 people. Today, the GME operation has 12 plants and 40,000 employees.

It is, according to sources, too early to say what will happen to these factories that remain. THere will, for example be a large cross-company review of plant efficiencies and productivity levels. Arising out of these benchmarking exercises decisions will be taken as to closure or otherwise.

It is quite clear from the latest statement
that GM and PSA Group have been talking about the acquisition of Opel and
Vauxhall plants for some time. Still to be thrashed out is the future of GME’s
engine plants. It might seem that until there is a complete switch-over to PSA
Group powertrains then there is some future for GME’s engine plants.

The future: strengthening both companies?

And
so it is that we have arrived at today’s announcement. But before the deal is
finally closed there is considerable work to be done in the area of due
diligence – a headache for in-house financial staff but a huge bonus for those
legal firms employed to carry out the work.

Under the deal, General
Motors and PSA Group have reached an agreement under which GM’s Opel/Vauxhall
subsidiary and GM Financial’s European operations will join the PSA Group in a
transaction valuing these activities at €1.3 billion and €0.9 billion,
respectively.

With the addition of
Opel/Vauxhall, which generated revenue of €17.7 billion in 2016, PSA will
become the second-largest automotive company in Europe, with a 17 per cent
market share.

The wording of the
statement is most interesting. Notice the use of the words ‘proud’, ‘fine’,
‘strong’ and ‘valued’ in PSA Group/General Motors management-speak.

“We are proud to join
forces with Opel/Vauxhall and are deeply committed to continuing to develop
this great company and accelerating its turnaround,” declared Carlos Tavares,
chairman of the managing board of PSA. “We respect all that Opel/Vauxhall’s
talented people have achieved as well as the company’s fine brands and strong
heritage. We intend to manage PSA and Opel/Vauxhall capitalizing on their
respective brand identities. Having already created together winning products
for the European market, we know that Opel/Vauxhall is the right partner. We
see this as a natural extension of our relationship and are eager to take it to
the next level.”

“We are confident that
the Opel/Vauxhall turnaround will significantly accelerate with our support,
while respecting the commitments made by GM to the Opel/Vauxhall employees,”
added Tavares.

“We are very pleased
that together, GM, our valued colleagues at Opel/Vauxhall and PSA have created
a new opportunity to enhance the long-term performance of our respective
companies by building on the success of our prior alliance”, said Mary T.
Barra, GM chairman and chief executive officer. “For GM, this represents
another major step in the ongoing work that is driving our improved performance
and accelerating our momentum. We are reshaping our company and delivering
consistent, record results for our owners through disciplined capital
allocation to our higher-return investments in our core automotive business and
in new technologies that are enabling us to lead the future of personal
mobility.”

“We believe this new
chapter puts Opel and Vauxhall in an even stronger position for the long term
and we look forward to our participation in the future success and strong
value-creation potential of PSA through our economic interest and continued
collaboration on current and exciting new projects,” Barra concluded, no doubt
hoping that by dumping Opel/Vauxhall she and her team in the US can indeed “accelerate
our momentum”.

Long-term benefits?

The statement says that the transaction
“will allow substantial economies of scale and synergies” in purchasing,
manufacturing and R&D.

“Annual synergies of
€1.7 billion are expected by 2026 – of which a significant part is expected to
be delivered by 2020, accelerating Opel/Vauxhall’s turnaround. Leveraging the
successful partnership with GM, PSA expects Opel/Vauxhall to reach a recurring
operating margin of 2 per cent by 2020 and 6 per cent by 2026, and to
generate a positive operational free cash flowby 2020,” the
statement adds.

It is clear, just
looking at PSA Group’s figures for last year, that 6 per cent is PSA’s magic
number.

PSA, together with BNP
Paribas, will also acquire all of GM Financial’s European operations through a
newly formed 50/50 joint venture that will retain GM Financial’s current
European platform and team. This joint venture will be fully consolidated by
BNP Paribas and accounted under the equity method by PSA.

The statement notes
that the transaction is another step in GM’s ongoing work to transform the
company, which has delivered three years’ record performance and a strong 2017
outlook, and returned significant capital to shareholders.

Of course, the question
has to be asked here: If GME has been transformed and there has been record
performances, why the need to sell it?

Without answering this
question, the statement notes the deal “will strengthen GM’s core business,
support its continued deployment of resources to higher-return opportunities
including in advanced technologies driving the future, and unlock significant
value for shareholders.”

It adds that by
immediately improving EBIT-adjusted, EBIT-adjusted margins and adjusted
automotive free cash flow and de-risking the balance sheet, the transaction
will enable GM to lower the cash balance requirement under its capital
allocation framework by $2 billion, which it intends to use to accelerate share
repurchases, subject to market conditions.

It adss that GM will
also participate in the future success of the combined entity through its
ownership of warrants to purchase shares of PSA. GM and PSA also expect to
collaborate in the further deployment of electrification technologies and
existing supply agreements for Holden and certain Buick models will continue,
and PSA may potentially source long-term supply of fuel cell systems from the
GM/Honda joint venture.

Terms
of the Agreement

Opel/Vauxhall automotive operations will
be acquired by PSA for €1.3 billion. GM Financial’s European operations will be
jointly acquired by PSA and BNP Paribas for 0.8 times their pro forma book
value at the closing of the transaction, or approximately €0.9 billion.

The transaction has a
total value of €2.2 billion for Opel/Vauxhall automotive operations and 100% of
GM Financial’s European operations.

The transaction value
for PSA, including Opel/Vauxhall and 50 per cent of GM Financial’s European
operations, will be €1.8 billion.

In connection with this
transaction, GM or its affiliates will subscribe warrants for €0.65 Bn. These
warrants have a nine-year maturity and are exercisable at any time in whole or
in part commencing five years after the issue date, with a strike price of €1.

Based on a reference
price of €17.34 for the PSA share, the warrants correspond to 39.7 MM shares of
PSA, or 4.2 per cent of its fully diluted share capital. GM will not have
governance or voting rights with respect to PSA and has agreed to sell the PSA
shares received upon exercise of the warrants within 35 days after exercise.

The transaction
includes all of Opel/Vauxhall’s automotive operations, comprising Opel and
Vauxhall brands, six assembly and five component-manufacturing facilities, one
engineering center (Rüsselsheim) and approximately 40,000 employees. GM will
retain its engineering centre in Torino, Italy.

The statement adds that
Opel/Vauxhall will also continue to benefit from intellectual property licenses
from GM until its vehicles progressively convert to PSA platforms over the
coming years.

It remains to be seen
what will happen with respect to GM’s van joint
venture with Fiat (in that programme the latter’s Doblo van is badged by
Vauxhall as the Combo). With this due to end the project seems to be dead in
the water. No doubt a quite different Combo will emerge by way of a re-badged
PSA vehicle – either Peugeot or Citroen.

Meanwhile, in
connection with the transaction, GM will take a primarily non-cash special charge
of $4.0-4.5 billion.

Pension Fund Commitments

All of Opel/Vauxhall’s European and UK
pension plans, funded and unfunded, with the exception of the German Actives
Plan and selected smaller plans will remain with GM. The obligations with
respect to the German Actives Plan and these smaller plans of Opel/Vauxhall
will be transferred to PSA. GM will pay PSA €3.0 billion for full settlement of
transferred pension obligations.

The transaction is
subject to various closing conditions, including regulatory approvals and
reorganizations, and is expected to close before the end of 2017.

COMMENT. Former top GM man, Nick Reilly, who has run plants in other parts of the world, including the Far East, makes the observation that the main problem with the two UK plants, and therefore issues which make the plants vulnerable to acts of closure, centres on purchasing: both plants have to import two key and expensive components for their products, namely the powertrain. In the case of the van plant in Luton these are supplied by Renault in France. And, with Brexit just round the corner, this could be another contributory factor.

1 comment:

Alan Bunting
said...

The UK van plant at Luton is admittedly a small element in the story, but it’s nevertheless a can of worms in its own right.The Vivaro van is produced as a joint venture with Renault. It’s near enough identical to the Renault Trafic, and its powertrain and other mechanical components come into the UK from Renault or its suppliers.We’re told the Vivaro plant is ‘safe’ for four years. But will PSA want to ‘take over’ and continue the JV with its main French competitor for that long?PSA has Peugeot and Citroen van models which compete head-on with the Vivaro and Trafic. They could be substituted for the Vivaro on the Luton production line.Or, as an interim measure, a PSA powertrain could – without much difficulty – be ‘implanted’ into the Vivaro. That would keep the Luton stamping facilities going.All Trafics, as well as Vauxhall/Opel Vivaros, were built at Luton until 2013. But then Renault switched Trafic production to its Sandouville plant. Did Renault back then see the writing on the wall re: Luton’s possibly questionable future viability? Another point worth pondering is whether the just-announced takeover grew out of the negotiations between GM and PSA which led to the smaller Vauxhall/Opel-badged Combo van being transmogrified from a Fiat product (the Doblo) to a PSA product due for launch in the next year or so.